Eight Defaults and 180 Years Later, Ecuador to Repay Bondholders

  • Ecuador says paying 2015 bonds will reduce credit risk
  • Oil drop may still hurt Ecuador's attempt to cut funding costs

Ecuador is poised to do something it’s never done in its more than 180-year history: repay a bond.

The nation has said repeatedly that it will honor $650 million of foreign debt due Dec. 15 as President Rafael Correa tries to do away with the country’s reputation as a serial defaulter. While Correa himself halted payments on $3.2 billion of debt in 2008 and 2009, saying the securities were illegitimate, bond prices indicate creditors expect the government will follow through this time.

By honoring its obligations, Ecuador has said it can restore investor confidence and lower borrowing costs. Apart from crisis-ridden Venezuela, Ecuador’s bond yields are the highest of any debtor nation in emerging markets. AllianceBernstein LP and Analytica Securities say Correa still has more to do if Ecuador, which has run budget deficits for six straight years and is dependent on oil revenue, wants to return to credit markets at favorable interest rates.

“What’s positive is that Ecuador has a new chance to honor, for the first time, the payment of its bonds,” said Santiago Mosquera, a former Fitch Ratings analyst who is now head of research at Quito-based brokerage Analytica. “But that’s probably not enough to lower rates to what they were in their last bond sale.”

Ecuador last tapped the overseas bond market in May, selling $750 million more of its notes due in 2020 to yield 8.5 percent. Those securities now yield 16.64 percent as of 1:41 p.m. in New York on Thursday as prices have fallen.

Ecuador’s Economic Policy Ministry referred questions to the Finance Ministry, which didn’t respond to telephone or e-mailed requests for comment on its financing plan for 2016 and its bond payment due next month. Those notes traded at 98.75 cents on Thursday, indicating bondholders expect the government to make the payment.

Finance Minister Fausto Herrera and Economic Policy Minister Patricio Rivera told reporters in Quito on Nov. 4 that they’ve been working with credit-rating companies, the International Monetary Fund and foreign investors to help lower the perceived risk of investing in Ecuador. 

“By far the most important thing for the country’s risk is that we are going to meet, for the first time in 180 years, the payment for the global 2015s,” Herrera said. “There is a possibility that, if market conditions improve, we could sell bonds to better structure Ecuador’s debt maturities.” 

Correa, a 52-year-old former economics professor, won praise from the IMF last month for taking measures to shore up Ecuador’s finances. He’s trimmed government spending, halted some infrastructure investments and cut fuel subsidies this year.

His decision to stop paying foreign debt seven years ago earned the country the distinction of being the most frequent defaulter in Latin America, eclipsing Argentina and Paraguay.

Ecuador first fell into default in 1832, according to the book “Debt Defaults and Lessons from a Decade of Crises” by Federico Sturzenegger, a former secretary of economic policy in Argentina, and Jeromin Zettelmeyer, a former assistant to the Western Hemisphere Department director at the IMF. At the time, the two-year-old nation was saddled with debts accumulated during its wars of independence. Decades of internal revolt and weak government institutions kept the nation’s early leaders from meeting payments on time, according to university professor Carlos Espinosa’s book "Historia del Ecuador."

Given the country’s legacy, lowering Ecuador’s borrowing costs will take time, said Marco Santamaria, a money manager at AllianceBernstein, which has $27 billion invested in developing nations. The market is still cautious because of the OPEC nation’s dependence on oil, he said. Global prices for crude, which accounted for about half of Ecuador’s export revenue in 2014, have plunged 46 percent in the past year.

Ecuador's sovereign bonds compared to oil prices

“To be able to sell bonds next year, there has to be some credible, multi-year plan for investors to feel comfortable,” Santamaria said from New York. “It’s not something they’re going to be able to do overnight.”

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